Value Added Tax and price stability in Nigeria: A partial equilibrium analysis

Abstract

The economic impact of Value Added Tax (VAT) that was implemented in Nigeria in 1994 has generated much debate in recent times, especially with respect to its effect on the level of aggregate prices. This study empirically examines the influence of VAT on price stability in Nigeria using partial equilibrium analysis. We introduced the VAT variable in the framework of a combination of structuralist, monetarist and fiscalist approaches to inflation modelling. The analysis was carried out by applying multiple regression analysis in static form to data for the 1994-2010 period. The results reveal that VAT exerts a strong upward pressure on price levels, most likely due to the burden of VAT on intermediate outputs. The study rules out the option of VAT exemptions for intermediate outputs as a solution, due to the difficulty in distinguishing between intermediate and final outputs. Instead, it recommends a detailed post-VAT cost-benefit analysis to assess the social desirability of VAT policy in Nigeria.

Macro-Econometric Modeling of Social Insecurity, Foreign Direct Investments and Economic Growth Association

“…On the other hand, public investment (Pub) though maintained the theoretically expected sign of positive influence on growth, but weak in its impact-8.1 per cent changes in levels of growth, for every unit change in the level of public investment. To explain this, we draw insight from Ikpe and Nteegah (2013) which earlier reported that the degree of impact of fiscal deficits of economic activities depends on the extent to which funds set aside for deficits financing is channeled to productive investments through the development of needed and maintenance of exiting social infrastructures. Considering the fact that deficits funds are often times diverted to private investments abroad, while some fractions are used for external debt servicing, gives rise to the situation where rather than adequately stimulate the levels of economic activities, fiscal funds instead create a nonadequate impact on the growth of the economy.…”

Value-added tax and economic efficiency: Role of country governance

“…However, this finding is still inconclusive in the empirical literature. For example, Marius Ikpe and Alwell Nteegah (2013) found that VAT on intermediate goods leads to higher general price level in Nigeria due to higher production cost and lower aggregate outputs in the economy. Such a situation will eventually lead to economic inefficiency because higher productions cost distorts the allocation of resources.…”